Cryptocurrency and Taxation Challenges

Cryptocurrencies have been in the news recently because tax governments believe they can be used to launder money and evade taxes. Even the Supreme Court appointed a Special Investigating Team on Black Money advocated that trading in these currency be discouraged. Even though China was reported to have prohibited some its biggest Bitcoin trading operators, countries like the USA and Canada have laws in place to restrict stock trade in cryptocurrency.

What is Cryptocurrency?

Cryptocurrency, as the name implies, uses encrypted codes to effect a transaction. Instead of using paper money, an internet ledger is updated with regular bookkeeping entries. The buyer’s account is debited and the vendor’s account is credited with such currency.

When a trade is initiated by a single user, her computer sends out a people cipher or public key that interacts with the private cipher of the person getting the money. If the receiver accepts the transaction, the initiating computer attaches a bit of code onto a block of several such encrypted codes which is known to each user in the system. Special users called’Miners’ can attach the extra code into the shared block by solving a cryptographic mystery and earn more Make money with cryptocurrency in the process. Once a miner supports a trade, the record in the block can’t be altered or deleted.

BitCoin, for instance, can be utilized on mobile devices too to enact purchases. All you need do is let the receiver scan a QR code from an app on your smartphone or bring them face to face by utilizing Near Field Communication (NFC). Be aware that this is very similar to ordinary online wallets like PayTM or MobiQuick.

Die-hard users swear by BitCoin for its decentralized character, international acceptance, anonymity, permanence of trades and information protection. Unlike paper money, no Central Bank controls inflationary worries on cryptocurrency. Transaction ledgers are stored within an Peer-to-Peer network. Meaning each computer chips in its own computing power and also copies of databases have been stored on every such node from the system. Banks, on the other hand, store transaction data in central repositories which are in the control of private individuals hired by the company.

How Can Cryptocurrency be used for Money Laundering?

The very fact that there is no control over cryptocurrency transactions by Central Banks or tax authorities means that transactions cannot always be tagged to a particular individual. This means that we don’t know if the transactor has got the shop of value legally or not. The transactee’s shop is similarly suspect as nobody can tell what consideration was given for the currency received.

What does Indian Law Say about such Virtual Currencies?

Virtual Currencies or cryptocurrencies are generally viewed as pieces of applications and hence classify as a great under the Sale of Goods Act, 1930.

Being a good, indirect taxation on their purchase or sale as well as GST on the services provided by Miners would be applicable to them.

There is still quite a bit of confusion about whether cryptocurrencies are valid as money in India and the RBI, which includes authority over clearing and payment systems and prepaid negotiable instruments, has certainly not approved buying and selling via this medium of trade.

Any cryptocurrencies received by a resident in India would thus be governed by the Foreign Exchange Management Act, 1999 as an import of products to this country.

India has enabled the trading of BitCoins in Special Exchanges with built-in defenses for tax evasion or money-laundering pursuits and enforcement of Know Your Customer norms. These trades comprise Zebpay, Unocoin and Coinsecure.

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